Despite DB Decline, U.K. Institutional Market to Provide Ample Opportunities for Asset Managers for Next 10-20 Years

While the corporate defined benefit (DB) market is fast maturing, the erosion of DB assets will play out over a timeframe of 35 years or so, leaving ample opportunity for asset management firms to maintain viable and lucrative DB institutional businesses for at least the next decade or two. The fact that most corporate DB schemes remain open to future accruals and that the pace of these closures is now slowing, that significant funding gaps must at some point be closed and that local authority plans remain open for business all provide ongoing support to the industry.

"Over the next 10 to 15 years, the story is not that opportunities will dry up for asset managers in DB, it’s that the opportunity set will shift as the market matures," says Greenwich Associates consultant Marc Haynes.

The Death of Equities

In 2006 U.K. equities made up a quarter of corporate DB pension assets. That allocation has declined more or less steadily for the past six years. In 2012 corporate allocations to domestic equities averaged only 10% of total assets. In the past year, companies also moved to reduce allocations to international equities, which dropped to 22% of total assets in 2012 from 26% in 2011.

The broad movement of assets from equities to fixed income has changed the basic composition of corporate DB investment portfolios. At present, companies have 46% of DB scheme assets invested in assets best described as "liability matching" in nature, as opposed to those that are "return seeking."

Greenwich Associates projects that liability-matching assets will grow to represent the vast majority of corporate DB assets in coming years.

Local authorities are also moving assets out of equities — their allocations to domestic equities to 26.1% of total assets in 2012 from 28.5% in 2011 and international equity allocations declined to 34% from 36% as they seek alternative asset classes that offer the promise of equity-like returns at lower rates of volatility.

Advice to Asset Managers

Many asset management firms will need to radically reposition their businesses and product offerings in order to remain relevant as demand shifts accelerate. "In spite of declining allocations, equities are still the dominant source of asset manager revenues in the U.K. institutional market today, but this will not hold," says Greenwich Associates consultant Lydia Vitalis. "We are advising our clients to firmly orientate themselves toward areas of secular demand including fixed income, where broad and deep capabilities are increasingly important, solutions advisory including LDI, alternatives including infrastructure and diversified growth."

Defined Contribution (DC) Opportunities

Meanwhile, the defined contribution (DC) market continues to benefit from a positive growth dynamic and as the search for more effective default investment options continues, there are opportunities for asset managers to provide both outcome-orientated solutions and ’building block’ components to the white label blended default funds that benefit consultants are increasingly recommending to their clients.